When companies have news they want shareholders to miss they often file it with the SEC late on a Friday afternoon. This was the case with the new employment agreement for Ralph Lauren, who is executive chairman and chief creative officer for the company that bears his name. Michelle Leder has made the “Friday night dump” her specialty and it was through a Footnoted.com tweet that I learned about this, and followed up with some Monday morning mining. While once common, employment agreements with excessive guarantees have grown rarer. Many shareholders vote against pay when packages are of even three years. On March 31, 2017, the board of Ralph Lauren signed an agreement with Ralph Lauren that will last for five years, through April 2, 2022. “His annual base salary will continue to be $1.75 million, and he will continue to have a target bonus opportunity in the amount of $6 million for each fiscal year.” These are extraordinarily generous guarantees, particularly given that the company also pays for a CEO.
However, the most alarming things in the agreement is what happens if Lauren – who is currently 77 years old --- leaves employment for any reason, including disability. In terms of salary and bonus, the treatment is routine, though still generous. Much more problematic is treatment of unvested restricted performance share units (“RPSUs”) and PSUs which “will vest at target in their entirety on the date of his termination of employment.” Similar vesting will occur if the company fails to extend the contract after in 2022.
In the last proxy statement the board reported that it had, “changed our equity program so that 100% of our NEOs’ annual equity awards will be performance-based.” But this, and other suggestion that vesting is “based on achievement” are simply not true for Ralph Lauren given the size of the loophole in small print in the new employment contract.
The PRSU generally vest based achievement of earnings per share (EPS) metrics; the PSUs include long-term metrics such as cumulative EPS. The company reports that performance level that needed to be achieved in order for the Fiscal 2016 PRSUs to be earned at target was an EPS of $7.01 per share; actual achievement was $6.42. A look at the 2015 proxy statement shows that the RPSUs also did not achieve target over the 2013-2015 time period. Yet, if Lauren retires for “disability” in the next five years his shares will vest 100% at target no matter how the company performs.
Ralph Lauren annual meeting likely won’t be held until August. Shareholders should mark their calendars to vote against the package and the compensation committee directors who approved it.